ECB President refuses to criticise Russia’s exchange rate policy

Trichet takes part in Helsinki seminar

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The President of the European Central Bank, Jean-Claude Trichet, does not want to criticise the exchange rate policy of Russia, which has been denounced by some experts as too lax.
      Speaking in Helsinki at a seminar arranged by the ECB and the Bank of Russia, Trichet emphasised that the results of monetary policy are what counts, and the policy implemented by the Russian central bank seems to be working well in the special conditions that prevail in the country.
      Russian monetary policy was the focus of the seminar on Wednesday morning. At the session, Sergei Mikhailovich Ignatyev, Chairman of the Bank of Russia, faced tough questions from his colleagues on the basis of Russia’s monetary policy.
     
The rise in the price of oil and increased oil exports have increased Russia’s oil revenue. The Bank of Russia has worked hard to prevent the rouble from strengthening too much against the US dollar by buying large amounts of dollars.
      To buy more dollars, the Bank of Russia has printed more roubles, leading to a 56% increase in the money supply.
      Roubles are so plentiful that short term interest rates have plummeted to near zero. Cheap loans have spurred the real estate and stock markets. Critics fear that the situation could lead to reckless lending, credit losses, and possibly even a new banking crisis.
      Ignatyev nevertheless defended the policy as the only one possible.
      "Last year inflation went down to 12 percent, and the target for this year is 8-10%. We have also promised to do all we can to prevent the strengthening of the rouble by more than seven percent in relation to the dollar. We feel that this is sensible, because a sharp rise in the value of the rouble would certainly harm the economy", he said.
     
The rouble has strengthened by six percent this year alone, and the recent increase in the price of oil adds to the upward pressure. The government’s decision to raise export fees for oil by 18% is easing the situation somewhat, and Ignatyev insists that the targets are realistic.
      The weakening of the dollar in relation to the rouble has also affected the position of the currency in the Russian economy. Ordinary people have long preferred to keep their savings in dollars, but now many people are using their dollars to buy euros or roubles.
      "Over time the euro could become more important than the dollar in the Russian economy", Ignatyev said.
     
In spite of the flow of petrodollars, one of the main problems of the Russian economy is that the money is not efficiently channelled through the banking system to companies and productive investments. Currently there are hardly any banks in Russia that would meet Western standards.
      Trichet says that more than half of Russia’s corporate finances and foreign capital flows come from the EU. However, the situation is likely to change in the coming years, when Russia’s new banking laws take effect. The ECB already engages in extensive technical cooperation with the Russian central bank in the establishment of a bank inspection system.
      Both central bank leaders spoke of the need for continued close cooperation. The agreement reached between Russia and the EU on the terms of Russian entry into the World Trade Organisation is leading to closer economic and trade ties on all levels.


Links:
  Dinner address by Jean-Claude Trichet, President of the European Central Bank, Helsinki, 25 May 2004

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